1. What is loan refinancing?
Refinancing a loan means that when you enter into a new contract, your new lender settles the outstanding loan with the old lender. This then terminates the agreement with the old lender.
A common reason for refinancing a loan is lower interest costs. However, there are several other reasons for a refinancing a loan: for example, the desire to
reduce the monthly burden with a longer term,
consolidate multiple loans,
top up a loan,
consolidate (high) credit card debt.
Find out more about common reasons for taking out a loan here.
Important: each lender applies its own specific lending criteria. Your personal situation determines which bank will lend you money and at what interest rate.
2. Advantages of refinancing a loan
According to Swiss law (KKG), you can always repay more than the agreed monthly instalment at any time. This is called a special repayment or an extra repayment. Making special repayments or repaying the entire loan early means you save on interest.
If you refinance a loan with a new lender, there may be advantages in terms of the conditions. Refinancing also gives you the opportunity to renegotiate the amount and the repayment term.
If you wish, the loan amount can be increased depending on your situation. This may also have a favourable effect on the conditions offered.
You can also choose to extend the repayment term and thereby reduce the monthly instalments. This makes the loan overall more expensive, however. In particular, it can make sense to extend the repayment term if the monthly repayment amount was set too high and you are otherwise likely to fall behind on your payments.
Important: late payments are not the only thing to have a negative effect on your credit standing. If you have a debt repayment plan with the lender, the 04 code will appear on your record at the Central Office for Credit Information (ZEK), which also negatively impacts any risk assessment carried out on borrowers. A debt repayment plan will be drawn up if you are unable to repay the loan in accordance with the agreement. In such cases, you should look into refinancing at an early stage.
Comparis tip
Credit intermediaries such as Credaris can help you find the right approach for your individual situation.
3. Disadvantages of refinancing a loan
Payment protection insurance is linked to the loan agreement. Therefore, the blocking period starts again when you refinance. This means that you are not protected during the blocking period defined in the conditions of insurance. This also applies if an existing loan is refinanced with the same lender.
It is possible that your new loan application may be rejected. This rejection is recorded in the ZEK database and is visible to all lenders. This may adversely affect a further attempt at refinancing. The requirements and criteria lenders use for approving loans are varied and complex. Therefore, even attempting to refinance or top up a loan may lead to a rejection.
4. FAQ – frequently asked questions about loan applications
In order to refinance a loan, you must first apply for a new loan and be approved for it. The process is much the same as applying for a first loan. The new lender handles most of the refinancing process. Once the loan has been agreed, the new lender transfers the outstanding loan amount to the previous lender. This fulfils the obligations of the previous agreement and the agreement is terminated.
The Consumer Credit Act states that loan agreements can be terminated early at any time. To do this, you simply repay the outstanding amount ahead of time. This regulation also means that a loan can be refinanced at any time with another bank. The lender may not charge any interest on the unused repayment term.
If you want to refinance, lenders run checks on your credit capacity and your credit standing in the same way as for a first loan.
Depending on how your situation has changed, you may be offered better rates for a new loan. Has anything has occurred during the term of the loan that negatively affects your credit standing or the lender’s risk assessment. There is no guarantee that a new loan will be possible.
If you're looking for a realistic assessment of your options, brokers such as Credaris can help.
In the case of consumer loans, the lender may not charge anything for the actual termination of the loan.
It may, however, charge administration fees:
Depending on the work involved, these administration fees can be up to 200 francs.
The final statement may cost between 20 and 150 francs, depending on the lender.
For loans that are not subject to the Consumer Credit Act, the lender is legally permitted to charge a fee for terminating the loan. However, most lenders refrain from doing so and just charge administration fees.
Once the new loan has been confirmed, the new lender will ask you for the final statement of the existing loan. This contains the total outstanding amount that needs to be paid in order to terminate the agreement. The rest of the process is the same irrespective of whether you are refinancing or taking out a new loan.
In order to refinance, you usually need the most recent balance or final statement of the current loan. You can either request this from the lender or use online tools if available. The lender may charge an administration fee to issue a final statement.
This article was first published on 05.01.2016